Insurance: the canary in the coalmine of climate change?

All over New Zealand, from Haumoana to Westport, from Edgecumbe to the Kāpiti Coast, from Dunedin to Wellington City, homeowners and businesses are starting to feel the financial effects of climate change.

After the recent Edgecumbe flood, for example, Tower Insurance stated that while there had been no blanket increase for insurance costs in Edgecumbe, some prices were going up: “On average, due to higher reinsurance costs and the increased risk, customers in the region could expect prices to increase by around 15 to 30 percent, with customers in areas of significant risk sometimes experiencing larger increases,” a spokesperson said in this Radio New Zealand report.

So are insurance companies taking more notice of climate change risk than homeowners themselves, or than local or central government? And who should pay for the damage caused by climate-related disasters, or for the incremental costs our changing climate is starting to rack up?

Three new projects in the Deep South National Science Challenge  address this question and others raised by insurance experts, social and economic policy researchers and climate scientists – who came together earlier this year in a dialogue process facilitated by Motu Economic and Public Policy Research Trust and supported by the Deep South Challenge. Together, these projects investigate the legal, economic and ethical dimensions of who should pay for damage caused by climate change events.

Legal liability, insurance and the risks of climate change

Coastal hazards are escalating with climate change. In particular, coastal homeowners can expect sea level rise and more frequent and intense coastal storms to affect their properties. Catherine Iorns, from the Law Faculty at Victoria University of Wellington, is investigating some of the legal questions surrounding sea level rise and insurance. Her project looks into the “tipping points” at which insurance companies might decide to refuse insurance to coastal property owners, and asks, what happens next? To what extent can or should homeowners rely on the Earthquake Commission (EQC) , or on local or central government, to compensate them if their homes become uninsurable, or uninhabitable, due to sea level rise, or because of associated climate risks like storm surges or coastal erosion?

Iorns’ project looks at one of the key trends in international climate litigation: trying to establish who is liable for taking (or not taking) adaptation measures.

The economic implications of insurance retreat

Despite the risks of sea level rise, coastal erosion and powerful storm surges, we’re continuing to see demand for coastal housing increase, as well as new and intensified development of existing urban coastal areas. Belinda Storey, Managing Director of Climate Sigma, who is undertaking a PhD in economics at Victoria University of Wellington, is investigating insurance retreat, through an economic lens. Escalating coastal hazards don’t seem to be reflected in home-owners’ decisions to purchase and renovate coastal property, and further, climate risk is likely not currently incorporated into the price of residential coastal property.  Evidence from overseas suggests that high insurance premiums and the unavailability of insurance has a stronger impact on private decision making than the uncertain risk of extreme events. Storey’s project therefore explores how coastal housing markets impacted by climate change might respond to “insurance retreat” – if insurance becomes unavailable. Her project will identify the locations around New Zealand most likely to lose access to insurance within the next few decades, as the likelihood of extreme events increases. 

The ethics of sharing risk

A third project being run by Elisabeth Ellis from the University of Otago addresses a key question that emerged from that dialogue between insurance companies and researchers: On a principled level, how should the risks of sea level rise be distributed between individuals, insurance, local and central government? Should we choose to view responsibility as individual or collective? And either way, which approach delivers the best and fairest outcomes? Ellis’s project will also look international literature on the ethics of risk distribution while highlighting New Zealand’s unique history and institutions.

Extreme weather, climate change & the EQC

One other (existing) project of the Deep South Challenge, being run out of Motu Economic and Public Policy Research Trust, by David Fleming, looks at the role of the EQC in paying for climate-related events and in fostering recovery post climate-related disasters. Although the EQC mainly helps households suffering earthquake damage, homeowners impacted by extreme weather like storms, floods or landslips can also make EQC claims for some damages. (For floods and storms, for example, the EQC will only cover the cleanup of debris and mud from the land below a house; it won’t cover damage to the house or its contents.) More frequent and more intense weather can therefore affect the EQC’s long-term sustainability. Over the last 20 years, the EQC has paid out over $240 million, on more than 17,000 claims, to households affected by non-earthquake disasters. Fleming’s project will study these claims, along with data from Statistics NZ, GNS and NIWA, to better understand how the EQC has covered households over time and across regions after extreme weather events; whether insurance pay-outs have supported households and communities to recover economically; and what the EQC’s financial liabilities might be into the future, given climate change projections about extreme weather.

Together, these projects represent a new and innovative direction for climate adaptation research in New Zealand. The Deep South Challenge is conducting research that responds directly to the needs of “the public” (represented by a range of professions and organisations), in order to better prepare New Zealand to deal with the risks of climate change and to begin to make changes now, while there’s still time for reasonable discussion and debate.